Upcoming actions from the Department of Labor (DOL), the
Securities and Exchange Commission (SEC), and the Financial Industry Regulatory
Authority (FINRA) are all expected to have a direct impact on the way
retirement plans are administered under the Employee Retirement Income Security
Act (ERISA) and other legislation.

Substantial attention is also being paid to the potential
for the U.S. Congress to pass meaningful tax reform at some point in
the next few years, according to Drinker Biddle experts, which could involve
the reduction or elimination of some tax benefits for workplace retirement
savers in the interest of growing government revenues.

In a conference call sponsored by Natixis Global Asset
Management, two experts from Drinker Biddle & Reath explored the 2015
regulatory agendas of the DOL, the SEC and FINRA. Bradford Campbell, counsel
with Drinker Biddle in Washington, D.C., and former Assistant Secretary of
Labor for the Department of Labor’s Employee Benefits Security Administration
(2007 – 2009), opened the discussion by quickly interpreting the results of the 2014
midterm elections for the financial services sector.

In short, Campbell feels the 2014 midterm elections, which saw Republican lawmakers take control of the
Senate while building an even stronger majority in the House, will be
relatively muted for the financial services sector.

“It’s not going to make a really significant difference in
the next two years, because the federal government is still divided, but I do
expect the tone around comprehensive tax reform will change and the faults and
problems they’re hoping to solve in the retirement system will change,”
Campbell explained.

For example, Campbell noted that much of the interest in
recent years in the Senate has focused on potential abuses committed by wealthy
people using individual retirement accounts (IRAs) and tax-advantaged retirement
plans to shelter assets from taxation. This focus can probably be expected to
decline when Republicans take the reins in January 2015, Campbell said. But unlike
earlier Republican majorities in the House and Senate, the current Republican
class in Congress seems willing to “shake out some additional revenue from the
retirement plan system,” Campbell noted, and to make changes to how tax
qualified plans are treated by the Internal Revenue Service.

“Both
Democrats and Republicans have this as a goal moving into 2015 and beyond, so
it’s something we as an industry will have to continue to watch closely,”
Campbell said.

Campbell observed that a bill passed last
year by the U.S. House of Representatives that would prevent the DOL from establishing a new definition of
“fiduciary” until the SEC finished harmonizing its own advice standards under
securities law was not taken up by the Democrat-controlled Senate. Now that the
Senate is set to go red, Campbell said it may be likely that this bill will be
passed by both chambers and sent to the President for a signature or veto.

“The bill could theoretically proceed under the new
Congress,” Campbell explained. “That’s something that probably wasn’t possible
before the change in control.” However, even this could be relatively
unimportant in 2015 and 2016, he added, as the Obama Administration is unlikely
to stymie the efforts of its own staff in the DOL by forcing it to wait for the
SEC before acting on a new fiduciary rule.

So where does the DOL’s fiduciary redefinition effort stand?
Fred Reish, an ERISA attorney and partner with Drinker Biddle in Los Angeles,
said the DOL continues to hold to its stated goal of releasing a new proposed
fiduciary definition in January 2015, but it’s yet unclear whether it has the
ability to follow through.

Campbell noted that the new fiduciary definition, or
“conflict of interest rule” as it is referred to by the DOL, was the only major
piece of regulation that did not get pushed back on the latest DOL agenda. He
also observed that the federal Office of Management and Budget’s (OMB) website
has not been updated to say that it has received the new rule language from the
DOL. As Campbell explained, the OMB must review new rules and regulations to determine things
like the cost of implementation and how the government will manage a enforcement.

“When you consider that the OMB’s normal review process
takes at least 90 days, that might tell us something about the real timing of
when the new proposal will actually come out,” Campbell noted. “This opens up a
few possibilities. Maybe the DOL has been doing a lot of behind-the-scenes
negotiation and pre-clearance with OMB, which would allow the new rule to go
through very quickly.” Campbell said that type of back-room maneuvering “would be pretty
unusual, but it is possible.”

“It’s also possible that the DOL just wants to signal
that this redefinition is important and ongoing, so they’ll wait to delay it
until the last minute,” he added. “It’s hard to say at this point.”

Asked
by Reish to speculate about what the final rule could look like, Campbell said,
“I imagine the DOL will in fact create a broad expansion of the fiduciary
definition, but my hope is that they will try to mitigate the most severe
impacts of this by also issuing new prohibited transaction class exemptions. We
won’t know this exactly until we see what’s published and what the industry
reaction happens to be.”

Reish noted that another important matter under consideration
by the DOL is the use of brokerage windows in employer-sponsored retirement plans. As explained
by the DOL, some 401(k)-type plans offer participants access to brokerage
windows in addition to, or in place of, specific investment options chosen by
the employer or another plan fiduciary.

These “window” arrangements can enable or require individual
participants to choose for themselves from a broad range of investments,
Campbell explained. In many cases participants can choose from the entire
universe of stocks and mutual funds, he noted, comprised of tens of thousands
of different options. Some plans even offer a brokerage window in place of a
core investment menu. This raises important questions about a plan fiduciary’s
ERISA-mandated duty to review and monitor investment options under qualified
retirement plans, Campbell noted (see “Brokerage Window Issues Still Open”).

Campbell said the DOL recently closed a request for
information period on a list of nearly 40 questions related to brokerage windows, so further action in the near-term
is likely. But, he noted that the most recent DOL agenda does not actually list
a next step for the effort, and the scope of the DOL's questions was very broad, so it is unclear what’s next.

“The agenda the DOL just put out kept this as an action item
but didn’t list a specific next step or deadline, but that
doesn’t mean it’s going away, not by any means,” Campbell said. “My sense is
that they are going to go through all the comments before deciding what their next
step is, but we should expect further action on this in 2015.”

Campbell said it will be helpful for retirement plan fiduciaries
offering participants access to a brokerage window to get more guidance about what
liabilities can arise from this type of arrangement. This is an especially
important matter in the wake of new fee disclosure requirements, for example
under 408(b)(2).

Importantly,
Campbell said there may not be enough time to issue a full regulation on the
topic before the end of President Obama’s second term in 2016, but “they could
do something more informal, similar to recent target-date fund guidance.”

Reish went on to suggest that potentially the most important
regulatory action of 2015 could involve “pension benefit statement requirements,”
which would basically oblige defined contribution plan fiduciaries and service providers to furnish
retirement income projections for each participant in a plan—likely to be
delivered via quarterly statements.

“For several years now the DOL has been trying to make a
regulation that helps a participant understand what their account is really
worth,” Campbell said. “So the account will be presented as $300 in monthly
retirement income, say, instead of just a gross figure of $180,000. The idea is
that this type of estimate would help participants understand if they’re on the
right path or the wrong path for retirement readiness.”

Both Reish and Campbell agreed with the theory behind the
pending regulation—that most participants don’t know how to relate a net
retirement account balance with their true retirement readiness—but each stressed
that it will be exceedingly difficult for the DOL to define how to do the
projection properly.

“So from my perspective, I think it will be interesting to
see what the DOL comes up with,” Campbell noted. “The technical issues are very
hard in terms of doing long-term income projections, especially for someone in
their 20s just starting out in a plan, so getting it right is something they’re
highly concerned about.”

Campbell said there is significant disagreement across the industry
as to whether monthly income figures should be derived from current account
balances, or from balances projected forward to the retirement date.

“The
DOL must be very careful to consider how these projections are incenting or preventing
good participant behavior,” he said. “Say a young person with a very small
balance looks at their current account value and sees only $20 or $30 in projected
retirement monthly income. Do we tell them this and risk their dropping out of
the plan? Or do we make a lot of assumptions and give them a more favorable
picture, but which may not be so accurate in the long run?”

Looking to FINRA and the SEC, Campbell and Reish expect
further debate and potential action on conflict of interest rules related to IRA
rollover solicitations. This is an area where there is some push and pull
between SEC and DOL, Reish said.

“I think DOL will eventually take the position that any
advice or solicitation related to a retirement account rollover into an IRA is necessarily
fiduciary advice,” Reish said. “This would give the DOL greater jurisdiction over
the entire rollover process. Of course, it would be extremely controversial.”

Reish and Campbell continued by observing the SEC and FINRA
have historically favored a disclosure-oriented approach to mitigate conflicts
of interest, while the DOL looks more towards actually prohibiting certain
transactions and advice. This healthy tension can probably be expected to heat
up further in 2015, the pair noted, as the regulators each move forward on
longstanding fiduciary issues.

The discussion closed on the topic of 408(b)(2) fee disclosure guides—an idea presented last year by the DOL to help retirement
plan sponsors interpret complex investment and service provider fee data supplied
under expanded disclosure rules.

Reish and Campbell both underscored the importance of plan sponsors
having support in the effort to understand complex fee disclosure documents,
but the two were fairly tepid on the idea that a guide or fee summary alone could solve the problem.

“It’s a real conundrum,” Reish said. “How do we ask plan
sponsors to do interpret the fee data effectively when the service providers are saying
it’s too much of an effort to even go through the data to build a table of contents
or a fee guide? It’s hard to see an answer that will satisfy both communities, sponsors and providers.
We need an innovative solution here.”